Stalking Craft

Usually, Anheuser-Busch – the nation’s largest brewer – isn’t one found to be slinking around in the shadows. But these aren’t usual times.

Beer, that staple of Friday frat parties and Saturday tailgates, is flatlining. According to Information Resources Inc., a market researcher, total beer sales grew by just 0.7 percent for the 52-week period ending Dec. 3, 2006. That followed similarly lackluster expansion in each of the previous two years.

Beer’s slump has come, ironically, at a time of near-record consumer spending. While shoppers have shown an almost insatiable appetite for $5 lattes, $500 shoes and $5000 televisions, brewers have somehow failed to connect with the nation’s unholy passion for consumption.

Or have they? One segment of the beer market that has been cruising along is “microcraft,” or specialty brewing market. Usually sold at a 25 percent premium over most mass produced brews, micro-craft beers grew by 17.2 percent over the same 52-week period, to $453 million, according to IRI. In fact, for many craft brewers, 2006 may go down as the year their sales broke through the copper ceiling: at year’s end, it made up more than 5 percent of the United States’ $8.7 billion in annual beer sales.

“Overall, the beer market is having its challenges, but people are going for high-end products that offer a more substantial flavor profile,” said Steve Harrison, vice president of the Sierra Nevada Brewing Co. Founded in 1980 by Ken Grossman and Paul Camusi, Sierra Nevada is the nation’s top-selling micro-craft beer, at about $53 million.

As trailblazers like Sierra Nevada know well, this isn’t the first craft beer surge. In 1996, U.S. craft brewers increased output by 26 percent. That year brought the end to a half-decade of growth that peaked in 1995 at 51 percent, but things ended poorly, with the industry awash in product and extra brewing equipment, a classic case of too much to soon.

But this time, brewers agree, something feels different. Not only are survivors like Sierra Nevada, Boston Beer Co., and Colorado’s New Belgium Brewing Co. more seasoned and battle-tested, but independent brewers have the sneaking suspicion they aren’t alone. The big brewers are looking over their shoulder, studying their moves, looking for a way into the game.

Somebody’s Watching You Ken Hehir, 42, works for Molson/Coors, not that the company has any interest in letting you know that. He oversees the brand and marketing promotion of two lines: Blue Moon Belgian White and Killian’s Irish Red. Neither one is marketed strongly as a Coors brand, as today’s picky beer drinker doesn’t necessarily associate mass production with high quality.

In fact, many off-premise and on-premise retailers mistakenly sell Blue Moon and Killian’s as imports, despite the fact that they have been Coors products for years (in Blue Moon’s case, from the start).

It’s a legacy of the first microbrew boom: during the mid-1990s the nation’s Big Three brewers launched a bevy of high-concept specialty beers, many of which were revealed to be poor imitations of the burgeoning craft scene. One of the only ones that survived was Blue Moon. It was launched in 1995 by a Coors master brewer who had earned his PhD in Belgium and wanted to recreate the country’s fruity, almost-sweet wheat beers.

Since 1995, Blue Moon has steadily gained momentum and market share, but it’s really taken off lately, growing by 115 percent in the first 10 months of 2006 alone, according to the Rocky Mountain News. According to industry estimates, the company was on track to sell between 400,000 and 500,000 barrels of Blue Moon in 2006, which would have made it the equivalent of the third- or fourth-largest craft brewer in the U.S., behind Boston Beer; Sierra Nevada and New Belgium. But it’s never been promoted as a Coors product.

“We’ve had a lot of success with word-of-mouth for Blue Moon without having to beat people over the head with it,” Hehir said. “I think it’s because people like to reward themselves by trading up a little bit. But while they do want to trade up, they don’t want to trade up too far in terms of flavor. They don’t want a beer they can’t cope with.”

The other major breweries are also trying to find the sweet spot held by unique but familiar-tasting beers like Blue Moon. Global brewing giant SABMiller, which bought the Miller Brewing Co. in 2002, recently scored a hit with its Fredrick Miller Chocolate Lager, which one reviewer called one of the “best new beers of 2006.” Miller also owns Henry Weinhard’s, which recently launched an organic offshoot. A-B has put out regional brews, developed by its brew masters in St. Louis and New Hampshire, distributing them across the Northeast and the Midwest.

Not only are major brewers encouraging their own employees to get crafty, they are also lapping up smaller, independent brewers at a rapid pace. In May, Anheuser-Busch announced it was buying Latrobe, Penn.-based brewer Rolling Rock from the InBev, but it also owns large shares in regional craft brews such as Chicago’s Goose Island Beer Co., Seattle’s Redhook Ale Brewery Inc., and Portland, Ore.-based Widmer Brothers Brewing Co.

St. Louis Craft Fair

To hear that Anheuser-Busch is focusing on high-end products is to invite snickers, but Pat McGauley, vice president of innovation at Anheuser- Busch, doesn’t let it worry him. To craft loyalists who openly question whether a beer can be considered micro-anything if it is brewed by A-B, McGauley long ago came up with a counter-argument.

“We tell them to taste our beer and tell us it’s not meeting their standards. Anheuser-Busch has some of the best brewers in the world and we are winning the skeptics over,” said McGauley, 43.

But winning the skeptics over, no matter how well qualified its brewers are, means that the St. Louis behemoth has to take the micro- craft boom seriously.

In many respects, it has. In addition to backing Redhook and Widmer, last year, Anheuser-Busch launched two organic beers, Stone Mill Pale Ale and Wild Hop Lager. The giant brewer also came out with a line of four seasonal specialty brews in bars, including Spring Heat Spiced Wheat, Beach Bum Blonde Ale, Jack’s Pumpkin Spice Ale and Winter’s Bourbon Cask Ale.

“This is a building-block type approach,” McGauley said. “We don’t expect these beers to pay off right away, but the news we are generating in the market is very, very positive. These beers are all about creating excitement in the beer category,” he said.

Anheuser-Busch is also looking to reinvigorate its organizational structure by giving its network of breweries the authority to make and distribute regional beers to a limited area. Last year, those companies brewed beers like Mule Kick Oatmeal Stout in St. Louis and the Demon Hop Yard Ale in Merrimac, NH. These items, while only available in restaurants and bars, were a way of giving brewmasters throughout the organization the flexibility to work with more specific flavor profiles and recipes, while creating a sort of local pride of ownership. Next year, the program will expand to all 12 of the company’s regional breweries. “Beer is absolutely an emotional purchase so we are always trying to make sure there is an emotional tie between our products and customers,” McGauley said. “This is all about giving some control and brand ownership back to the consumer.’

Backlash

The big-beer ownership behind these brands has led some independent brewers and their supporters to deride them as “stealth beers” or “pseudo crafts.”

Jim Koch, president and founder of Boston Beer, the nation’s largest craft brewery (and a company that is derided on occasion as having gotten too big itself ), argues that the definition of a craft brewery is small, independent and authentic, meaning it can’t produce more than 2 million barrels, and can’t be owned by a larger brewer.

But Coors’ Hehir argues this definition ignores the care and steps a brewer takes in brewing his or her beer.

“It’s carefully-crafted, it’s a complex recipe and it takes a lot of time to brew,” Hehir said of Blue Moon.

Whatever words get used to paint the picture, it’s clear the brewing landscape is changing.

Mark Selner, beer buyer for Surdyk’s Wine and Cheese Shop in the Twin Cities, sees the end result of that every day.

Even though Surdyk’s is just a few short miles from the University of Minnesota’s campus, an increasing portion of the store’s beer sales are driven by craft or specialty beers. Selner, who started at the store in 1973, said there were maybe a few dozen beers in the early days, mostly old regional favorites like Augsberger. Today, Selner estimates the store carries close to 300 different kinds of beer, largely to accommodate the never-ending search to try something new.

“People are into the unusual. Highest this, most that; the beer with the sharpest hops, the most alcohol,” he said.

And small liquor stores aren’t the only ones taking notice. Greg Maurer, executive vice president for the Heidelberg Distributing Co., points to large grocers and discount clubs such as Pittsburgh’s Giant Eagle Supermarkets that are restocking their coolers in states that allow beer and wines sales to reflect a more diverse offering.

“If nothing else it is a statement they are making that they are willing to service their customers’ needs and wants,” Maurer said.

Building a bigger ring

Brewers and wholesalers often point to one of two factors to explain the recent surge in craft brews and imports. One is a growing wealth of upper-middle class professionals who often work hard and spend even harder. The other is the so-called identity factor. With more disposable income, consumers are looking for brands or products that set them apart, that communicate their likes and dislikes, their social status. Maurer sees both factors at play.

“It’s that high-discretionary-income, young consumer. They’re doing it partly for the identity factor, partly because of high income, and partly because of flavor. It becomes ‘Who am I?’ and ‘Can I define who I am by what I drink?’” Maurer said.

Convenience stores and other off-premise retailers can benefit greatly from this kind of soul-searching. While a six-pack of 12 oz. Budweiser or Miller bottles may cost retailers $4 and retail for $5.49 plus deposits, the same six-pack of Sam Adams or Flying Dog may cost $5.25 and sell for anywhere from $7 to $7.50. That’s roughly the same profit as import beers, and is at least 16 percent better profit than most mass domestics.

“It’s a good volume and it’s a really good ring, so it’s a high margin item that moves pretty well,” Harrison said.

Like many, Coors’ Hehir sees Starbucks as an example worth emulating. While Starbucks redefined coffee as a luxury item at $5 per cup, it has also created a luxury lifestyle: customers who stop in for a latte often leave with a cookie, a compact disc, or a book. Beer drinkers who spend more per bottle also will make impulse buys, something that retailers appreciate.

“I think people let the situation guide them. Sometimes it’s a craft brew. If they are mowing the lawn and just want something that’s easy-todrink and refreshing, it might be a Coors. The ideal is for them to walk out with both,” Hehir said.

Loud footsteps

In 1990, Jim Koch predicted “better beers,” crafts and imports, would account for 20 to 30 percent of domestic beer sales and craft beers would account for “at least a third of that” by 2010.

With three years to go craft brewing still has a way to go, but it has pushed its head above the 5 percent mark for the first time.

“To me great beer is a great beverage,” Koch said in January. “I think people are thirsty for quality, flavor, variety and authenticity in their beverages and that is where I think the growth is.”

But there’s something different in this craft boom than the one Koch rose to prominence in during the1990s. For one thing, he said, the brewers are a lot more professional.

“In some ways crafts grew so fast in the beginning of the 1990s that I just think there was an adjustment to a more modest growth spurt,” he said.

While specialty and craft brewers may be the toast of the town now, they have reason to be looking over their shoulder, said Maureen Ogle, author of Ambitious Brew: The Story of American Beer.

Ogle notes that for all their growth, craft brews still account for only 6 percent of the nation’s beer. The other 94 percent comes from Big Brewers. Anheuser-Busch alone accounts for half the beer sold in the U.S. Budweiser, 18 percent.

The reason big brewers seemed to fail during the first craft revolution during the nineties was partly because they didn’t take it seriously, Ogle said. Brewers like Anheuser-Busch seemed to think they could find any pre-Prohibition beer recipe, slap an old-timey label on it and it would sell regardless of what it tasted like.

Fifteen years later, Ogle thinks they’ve smartened up. Gone is the haphazard approach to brands; back is massive influx of investment that characterized the post-World War II era, when brewers like Anheuser- Busch, Coors and Miller survived a sustained drop in beer consumption by adding capacity, exploiting every possible niche or fad imaginable and innovating until the Baby Boom reached legal drinking age.

Ogle sees gluten-free beers, like Budweiser’s RedBridge, as an example of the sound, long-term investment big brewers are making.

“They are just getting a lot smarter,” Ogle said.

Consolidation is also helping reinvigorate the brewing industry, Ogle said. South African Breweries 2002 purchase of the Miller Brewing Co. from Philip Morris started that company on a track to rediscovering its brewing roots. Successes like the company’s chocolate lager show, in a limited way, how much the Milwaukee brewing company is refocusing itself on beer. So does A-B’s regional beer program.

If major brewers were to get organized, independent brewers and retailers would have plenty of reason to be worried. With their vast distribution networks, big brewers can exert tremendous control over retailers and the beer they stock, even pulling their major brands if a retailer isn’t cooperating. That, combined with acquisition and advertising budgets that would make most European countries quaver, mean things could get a lot nastier before they improve.

“Anheuser-Busch and Miller could be way more aggressive exploiting their marketing advantage and throwing their advertising dollars around. I think a lot of those small brewers are going to go away,” Ogle said.

Like any small business, independent craft breweries also face questions about succession. Many of the nation’s craft brewing pioneers are graying. Grossman, Koch, and Anchor Steam’s Fritz Maytag are all nearing retirement age.

How long can craft brewing’s growth last? Like Koch and other craft brewers, Ogle can’t say for certain, but she doesn’t see beer drinker’s thirst for the unusual drying up any time soon.

“Now, kids are used to going into the grocery store and seeing 35 different kinds of beer from 34 different brewers. I don’t see that going away. I think there is always going to be a segment, a small segment of the market that always gravitates to choice, just like they want 500 channels on cable,” she said.

What might change, though, is that the big brewers seem to be pretty interested in making some off-beat programs of their own.